The 50/30/20 Rule: How To Budget, Save Money, and Pay Off Debt Easily

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The 50/30/20 budget is one of the many rules of thumb in personal finance. This simple budgeting technique is great if you are new to budgeting and are looking for answers to questions like: “how to save money when you are broke?” or “how much of your salary should go towards paying off debt, savings, and investments?”

Personal finances are simply just that – personal. Everyone’s situation is different, however, there are enough similarities to make budgeting rules like the 50/30/20 or the 30/30/30/10 work most of the time.

What is the 50/30/20 Budget Rule?

The 50/30/20 budget plan refers to spending 50% of your after-tax income on essential living expenses (Needs), 30% on Wants, and the remaining 20% on debt repayment and savings.

First, you need to determine your monthly after-tax dollars. This is the amount of your paycheck after deductions like taxes and social security have been taken out. If you have deductions for pensions (401k) or health insurance, add them back as they are accounted for in our 50-30-20 budget calculations.

Now allocate your money as follows…

50% of your Income: Essential Needs

Plan to spend no more than 50% of your take-home pay on day-to-day living expenses you can do without such as:

Housing (rent and utilities)

Groceries

Transportation

Insurance

Minimum monthly payments on debt e.g. credit cards and student loans

Clothing and personal care

Healthcare

Childcare

Budgeting is an exercise in determining what your needs vs. wants are. Using the 50/30/20 budget rule, needs refer to the absolute essentials required for you to survive from day to day.

For example, clothing here does not include the brand new Italian leather shoe you choose to buy to keep up with the latest fashion trends. Also, only the minimum required payments on debt qualify as a need.

30% of your Income: Wants

Yay! Your life is not going to be so miserable after all! Plan to spend 30% of your after-tax income on wants like the nice Italian shoes, vacations, movies, dining out, gym membership, pets, cable TV, and other luxuries that are not “must-haves.”

20% of your Income: Debt Repayment and Savings

At least 20% of your paycheck must go towards paying off debt and saving for the future.

Earlier, I talked about making the minimum payments on your debt as a part of your 50% allocation for needs. The 20% portion of your budget is for getting rid of your debt as soon as possible. As you know, making only the minimum payments on a credit card means you are going to be in debt indefinitely as your interest fees continue to compound.

20% of your after-tax income has to go towards aggressively paying down debt and saving money in your emergency fund and retirement accounts.

You can also re-arrange the 50/30/20 rule as 20/50/30 in the spirit of paying yourself first!

50/30/20 Budget Example

Assuming your monthly paycheck is $4,000. Using the 50/30/30 rule, you should plan to spend:

Essentials (Needs): $2,000

Wants: $1,200

Debt and Savings: $800

I consider the percentages to be the maximums you can spend for needs and wants, but the minimum for debt and savings. For example, it is possible you could live a bit more frugally and not spend $1,200 on dining out, travel, cell phone bills, cable TV, and other non-essentials.

If you are able to cut your discretionary spending to $700 for the month (for example), the remaining $800 can be used to beef up your ‘needs’ budget, pay down debt faster, or ramp up your emergency fund savings.

You can use the Nerd Wallet’s 50/30/20 budget calculator to estimate the numbers for your monthly income.

Is the 50/30/20 Budget Rule for you?

The 50-30-20 budget rule is simple which makes it easy for folks who are not interested in long spreadsheets and super-detailed budget tabulations.

With that being said, life’s not always straightforward. What happens if your needs far outweigh 50% of your take-home pay? you can’t just simply skimp on paying your bills. If you do, there will be a reckoning, such as your home could be foreclosed, your credit score may become tattered and you may lose your car.

To manage your essential spending, you may need to radically cut your expenses and find ways to make more money.

There are some scenarios where the 50/30/20 budget does not work out-of-the-box. These include:

1. Living in an HCOL City: If you live in a city where the cost of living is extremely high and your income is below average, making the 50-30-20 rule work can be a tall order.

For example, it is advised that your housing costs should not exceed 30% of your take-home pay. If you are paying much more, it is time to consider relocating, downsizing, or taking on a roommate. The same goes for childcare. Extremely high childcare costs can make budgeting using this rule difficult.

2. High-Interest Debt: If you have significant credit card debts, just making minimum payments won’t cut it. With interest rates on credit cards as high as 20% or more, it makes no sense to put your money in a savings account that is earning 1% APR while your debt interest costs continue to mount.

3. Aiming for FIRE: if you are planning to retire early, you may need to set aside a greater percentage of your income. it is not unusual to see folks in the FIRE movement saving as much as 70% of their net income.

4. High-Income Earners: Assuming you make $20,000 monthly in after-tax income. Using the 50/30/20 rule, you can spend $6,000 per month on non-essentials (wants). This looks like a lot of money to splurge on discretionary spending like dining out or cable.

Of course, it’s ultimately your choice what you spend your money on, however, it’s worth noting that the 50/30/20 rule may need some tweaking for higher-income earners.

Alternatives to the 50/30/20 Rule

The 50-30-20 rule percentages do not have to be set in stone. I will wrap up this post by pointing out a few other budgeting rules and techniques you may find useful.

1. 30/30/30/10 Budget Rule: With this rule, you spend 30% of your take-home pay on housing; 30% on utilities, groceries and childcare; 30% on debt repayment and savings; and 10% on entertainment and other wants.

This budget technique separates housing into its own category so you can better focus on not spending more than 30% of your income on this expense.

2. 30.10/60 Rule: Here you spend 30% on needs, 10% on wants, and 60% on savings and debt repayment. This budget is for the get-out-of-debt fast individual who wants to destroy debt quickly while also saving for retirement.

3. Zero-based Budgeting: Popularised by Dave Ramsey, the zero-based budgeting is a method of budgeting in which your income minus expenses equals zero and every dollar gets a name. This is a nitty-gritty approach to budgeting because you are accounting for every single dollar on your pay stub well before you get it.

Matched up with a cash envelope system, a zero-based budget can work wonders.

Conclusion

When it comes to successful budgeting, it is important you find the sweet spot that works for you. Choose a proportional budget that helps you save/invest, pay off debt, meet your daily obligations, and have fun at the same time!

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